House NFIP reform legislation holds promise and pitfalls

The package of bills adopted by a key House of Representatives committee to reform the National Flood Insurance Program and put it on a path to financial solvency could help ease private insurers into the market — but some reform provisions conflict with each other, and even bolder ones may not survive the legislative process, experts say.

The House Financial Services Committee has adopted a series of measures in the past two weeks to reform and reauthorize the program for five years — some of which received bipartisan support, while others were more contentious and adopted mostly along party lines.

“While I would like to see some strong reforms, it’s going to be an iterative process,” said Steve Ellis, vice president of the Washington-based Taxpayers for Common Sense. “Eventually, I think the private market will become an even more robust market and start taking some of the policies off of taxpayers’ backs, and then also hopefully more Americans will actually have flood insurance coverage than currently do.”

One of the bills, H.R. 1422, the Flood Insurance Market Parity and Modernization Act, would clarify that flood insurance policies written by private carriers satisfy the mandatory purchase requirement, meaning that people who buy private flood insurance would receive the same treatment as those who purchase it through the NFIP if they're trying to obtain federally backed mortgages that require flood insurance. It passed the committee by a vote of 58-0.

H.R. 2874, the 21st Century Flood Reform Act, sponsored by Housing and Insurance Subcommittee Chairman Sean Duffy, R-Wis., aims to improve the financial stability of the program, increase the role of private markets in the management of flood insurance risks and provide for alternative methods to insure against flood peril.

The bill includes a provision calling for the elimination of the noncompete requirement, meaning elimination of the regulatory restriction that currently prevents insurers participating in the NFIP’s Write Your Own program from selling both NFIP and private flood insurance policies.

However, one of the bolder, more contentious provisions in the bill, which passed the committee by a 30-26 vote, would eliminate the Federal Emergency Management Agency’s ability to offer flood insurance coverage after Jan. 1, 2021, for new structures added in flood hazard zones, forcing them to obtain private insurance, and residential properties with high-value replacement costs.

“I think the hope with ruling out NFIP coverage for new development is to spur the private market and to hopefully have the cost of flooding better incorporated into decisions on where we build,” said Carolyn Kousky, director for policy research and engagement at the Risk Management and Decision Processes Center at the Wharton School of the University of Pennsylvania in Philadelphia. “The thought was if you have to pay for private market coverage, which in riskier areas is likely to be more than the NFIP, that you might think harder as a community, as a developer, as a buyer about where you’re locating. Whether that would actually happen, I’m not sure. There’s a lot of pressure in a lot of communities to continue to develop in risky areas.”

Given the highly contentious nature of the new development provision, it is unlikely the Senate will take it up, even though “it’s a smart way of reducing risk for the property overall,” said Laura Lightbody, director of the flood-prepared communities’ initiative of the Pew Charitable Trusts in Washington. If the Senate does take it up, it will have to bring key stakeholders, including home builders and realtors who oppose the provision, to the table to work out critical details, she said.

H.R. 1558, the Repeatedly Flooded Communities Preparation Act, would amend the National Flood Insurance Act of 1968 to ensure community accountability for areas repetitively damaged by floods by requiring them to develop mitigation plans. While these properties comprise just 1% of the claims filed through the NFIP, they have historically accounted for between 25% and 30% of the program’s losses, Ms. Lightbody said.

The debate over this bill, adopted by the committee by a voice vote, was also contentious because the initial language would have required the administrator to sanction covered communities that fail to comply, including suspending them from the NFIP. But the amended bill gives the FEMA administrator flexibility in determining sanctions.

“While I wouldn’t say the whole thing was a paragon of bipartisanship, it did show that the majority was willing to work with the minority on some of these issues,” Mr. Ellis said.

But in trying to get to a compromise bill, there are many provisions that conflict with each other, Ms. Kousky said. For example, one provision calls for increasing the coverage limits for businesses and homes, which would contradict other provisions aimed at shrinking the program and reducing its future liability, she said.

“There’s a lack of consistency there that needs to be handled,” Ms. Kousky said.

The program is set to expire on Sept. 30, 2017, and the full House may vote on the package in the next month or so while stakeholders await the Senate Banking Committee’s legislative proposal.

“Hopefully this will get dealt with before things get to a crisis mode on Sept. 29,” said Stu Mathewson, a director and member of the Washington-based American Academy of Actuaries’ flood insurance work group.